Is $250,000 really rich?

 Who knows where the number came from, but whenever the subject of extending the Bush tax cuts comes up, the line between the haves and the have-nots seems to be $250,000. If you make more than $250,000 you can afford more taxes is what many politicians on the left apparently believe. Fortunately, President Obama caved to GOP pressure and went along with the tax-cut extension by saying something along the lines of, "when you're in hostage negotiations, it's best to not harm the hostage. In this case the hostage was the American people." Silly illustrations aside, I think he did right by extending the tax cuts to all tax-paying citizens. As a recent Economist article pointed out, Federal Government spending is 24% of GDP and tax receipts are 15% of GDP this year. If you raise taxes on  those who make more than $250,000 a year and raise capital gains by 5% to 20%, the extra tax revenue will only cover the deficit for 9 days.When it is put in that perspective, one is left with the feeling that $250,000 is an arbitrary number pulled out of thin air; and those that argue people making more than that are "rich" are promoting class warfare whether they realize it or not.

The following article, "Down and out on $250,000 a year"does an excellent job revealing what a family of four making the magical $250,000 really has left at the end of the year. To control for geographical cost and local tax rate differences, the article models 5 different cities across the nation: Huntington, NY, Plano, TX, Pinecrest, FL, Naperville, IL and Glendale, CA.

The results are shocking, but not surprising.

How to Make the Dollar Sound Again

Here's a must read from James Grant, one of the more intelligent and dead-pan humorous guys on the street in my opinion.

In Gold We Trust

A realistic alternative to QE 2

The results of the most recent and much anticipated Fed meeting are out. The Fed is going to purchase $600bil in bonds through June 2011 to help stimulate the economy by flattening out the middle of the yield curve. The hoped for stimulus resulting from this move will be lower mortgage and interest rates which will theoretically make it easier for small businesses to get loans for expansion and eager home buyers to get a piece of the American Dream. Not sure how that will help stimulate employment though. From my vantage point, it doesn't matter how low mortgage rates go if nobody will refinance or lend to you without a job. And with few exceptions, I'll wager not many small businesses are eager to expand in the current political climate. From a saver's point of view, with money market rates already well below 1%,  it's not like anybody is going to go out and buy a Chevy Volt off their earned interest. It's hard not to conclude that if the Fed continues down this path they are going to lose credibility in the not too distant future; at which point, "...backed by the full faith and credit of The United States of America"--the phrase that underpins our debtor nation--will be worth less than a wooden nickel.

QE 2: not just another giant ocean liner

I remember several years ago, before they decided to dismantle her in Dubai, when the Queen Elizabeth II arrived in San Francisco to much fan fare. People lined the bay all the way from the Golden Gate Bridge to her berth over by Pier 29. I happened to be crossing the Bay Bridge after she had berthed and caught a glimpse of her transom. It was massive. It almost dwarfed the impressive west-looking view of the San Francisco skyline. But that was the old QE 2. The new QE 2, even bigger and more impressive than the last, was christened in Southampton earlier this month. Ironically, this is happening at the same time that the markets are widely speculating that the Fed will announce the details of its own version of QE 2 at the conclusion of their meeting on 3-NOV. 

Top 10 Things I Hate Most About Trading

On a lighter note, but with a heaping teaspoon of truthiness...
Courtesy of The Dopey Cowboy

DARK POOLS are the one thing that keeps me up scratching my head at night. Regulators in all their genius, decided that your every day Joe Schmo investor was being treated unfairly and needed more market transparency.  So what did we do?  We created “dark pools” of super secret hidden liquidity. So much for transparency and disclosure.

VWAPS also helped to destroy the industry.  Market data that started out as a way to analyze daily stock activity has become a way of life.  How pathetic. Being average has now become the bogie.  There went all the creativity and differentiation amongst market makers, sell-side and buy-side traders.  It’s no longer about getting the best price for your customers or not impacting the tape.  It’s about being within a penny or two from the VWAP.

ALGOS- Screw them too. If I had my way, they’d be plucked off everybody’s desk like chickens. Stretch this! We are traders – not monkeys. We are supposed to prove how good we can trade based on information, levels, conviction and “feel”.  It's not trading when you throw your order in some algo and watch the micro-reports come back.

Flash Crash

Last Friday the SEC released the much anticipated report on the "Flash Crash" that occurred 6-MAY-2010 when the Dow sold off 700 points in a matter of minutes then recouped much of the losses almost as quickly to close down 347 for the day. The report found that a single market sell order of 75,000 SPX e-Mini futures contracts with a notional value of $4.1bil caused the sell off. To put that in perspective, 1 e-mini contract is equal to 500 SPY shares. That's the equivalent of sending 37,500,000 SPY to sell at the mkt with absolutely no regard to price. One can't blame the market for treating a mkt order like a mkt order. That's about 1/6th of the avg daily volume for the SPY. Although not officially named in the report, it has been revealed that a trader at the firm Waddell & Reed Financial in Kansas was responsible for the order. That's not exactly "adding alpha" to performance, which is the end goal of every trader.  

How sausage is made

I recently returned from a three day trip to Washington D.C. where I attended the annual Security Traders Assoc. conference and met with a few of our elected officials as a representative from the board of the San Francisco affiliate of the STA. Generally the convention is in a more exotic location, but this year since Wall St. is everybody's favorite punching bag and with so much pending legislation that will fundamentally alter US equity markets, the organizers thought it would be prudent to really focus on the political end of our existence.

Good advice from the grave

Tax reduction thus sets off a process that can bring gains for everyone, gains won by marshalling resources that would otherwise stand idle—workers without jobs and farm and factory capacity without markets. Yet many taxpayers seemed prepared to deny the nation the fruits of tax reduction because they question the financial soundness of reducing taxes when the federal budget is already in deficit. Let me make clear why, in today's economy, fiscal prudence and responsibility call for tax reduction even if it temporarily enlarged the federal deficit—why reducing taxes is the best way open to us to increase revenues.
—President John F. Kennedy,
Economic Report of the President,
January 1963

The politicians of yore sure were different animals.

Geithner: unemployment could rise

WASHINGTON (Reuters) - Treasury Secretary Timothy Geithner said the U.S. unemployment rate could rise for two months before it drops, potentially deepening Democrats' problems in the November congressional elections.
"It's possible you're going to have a couple of months where it goes up," Geithner said on ABC's "Good Morning America" interview broadcast on Tuesday and taped a day earlier.
"But what we expect to see ... is an economy that's gradually healing. Of course we want to do what we can to reinforce that process because it's not growing back as quickly as we'd like."

I wish it would rise by one person, Turbo-Tax Timmy to be exact. Everything he says is preempted in my mind by the words "tax cheat." It has the effect of discounting everything else he has to say, even if he has a point. That's not an admirable trait in a Treasury Secretary of the United States.

Do as I say, not as I do

The WSJ recently reported a case where a carpenter's union hired non-union picketers to protest a building project that was using non-union labor for the project.
 

WASHINGTON—Billy Raye, a 51-year-old unemployed bike courier, is looking for work.
Fortunately for him, the Mid-Atlantic Regional Council of Carpenters is seeking paid demonstrators to march and chant in its current picket line outside the McPherson Building, an office complex here where the council says work is being done with nonunion labor.

Logic v. Emotion

There are two recent op-eds that illustrate rather succinctly what motivates the opposite ends of our political spectrum. From the right comes Art Laffer's piece that appeared in the WSJ this morning titled Unemployment Benefits Aren't Stimulus:

The most obvious argument against extending or raising unemployment benefits is that it will make being unemployed either more attractive or less unattractive, and thereby lead to higher unemployment. Empirical research supports this view.
The Democratic retort is that the economy today is so different from the past that we have to suspend our traditional understanding of economics. With five job seekers for every job opening, the unemployed are desperate for work and increasing unemployment benefits will have very little if any disincentive effect. This view hinges on a total change in employee behavior from "normal" times to the current period of "the Great Recession."

 From the left we have Paul Krugman writing a recent piece in the NY Times titled Punishing the Jobless:

Today, American workers face the worst job market since the Great Depression, with five job seekers for every job opening, with the average spell of unemployment now at 35 weeks. Yet the Senate went home for the holiday weekend without extending benefits. How was that possible?
The answer is that we’re facing a coalition of the heartless, the clueless and the confused. Nothing can be done about the first group, and probably not much about the second. But maybe it’s possible to clear up some of the confusion.
By the heartless, I mean Republicans who have made the cynical calculation that blocking anything President Obama tries to do — including, or perhaps especially, anything that might alleviate the nation’s economic pain — improves their chances in the midterm elections. Don’t pretend to be shocked: you know they’re out there, and make up a large share of the G.O.P. caucus.

 The questions we should ask ourselves are these: do we make better, more informed decisions using logic or emotion; and which of the authors makes the more logical argument?